When a bank loans money to an individual or corporate entity, they do so with the expectation that they will be repaid. Accordingly, they will ensure that they are in a position to collect on a debt owed to them. A recent decision from the Court of King’s Bench of Alberta serves as an example of what a court will consider when determining whether someone should be considered as bankrupt, insofar as to determine who their creditors are, and what priority they have for repayment. The case involved a company that borrowed money from a bank but failed to repay the loan. The bank then sought to bolster its collection chances by having the Court determine that the bank’s customer had effectively entered into bankruptcy, thus establishing a priority list of creditors.

Bank applies to have respondents declared bankrupt

In the case of Royal Bank of Canada v FASI 2 Ltd, the matter came before the Court when the bank (the “applicant”) asked the Court to find that the respondent should be declared bankrupt under the Bankruptcy and Insolvency Act on the basis that they respondents (the corporate entity and its directors) owed them at least $1,000. Further, the applicant claimed that the respondents had committed an act of bankruptcy within six months prior to the application being filed.

In response to the application, the respondents admitted they owed the applicants more than $1,000 but denied that they had committed acts of bankruptcy, in part because one of the co-respondents had resided in Texas for over a year since the application had been made, and therefore the Court had no jurisdiction over the matter. The applicant also stated that the same co-respondent had acted contrary to the Fraudulent Preferences Act when he entered into a share transfer or respondent shares with his wife shortly following the commencement of the proceedings.

Court addresses the bankruptcy order

The Court first looked at whether the corporate respondent should be considered bankrupt, as the Bankruptcy Insolvency Act requires any would-be creditor to show that a debtor owes at least $1,000 and has committed an act of bankruptcy within six months of the filing of the application.

In this case, the directors of the corporate respondent had opened a restaurant under a corporation named “FASI”. FASI entered into a credit card agreement with the applicant bank, as well as a loan and a number of loan-amending agreements over 2019 and 2020. As a part of these loans, the parties entered into a General Security Agreement and a Security Agreement, as well as registering the associated security interests with the Alberta Personal Property Registry. By early 2021, the corporate respondent had failed to repay amounts owing to the applicant, who then demanded repayment of the outstanding indebtedness pursuant to the parties’ loan agreements. In total, the applicant had already successfully argued that the corporate respondent and the two named directors owed them over $550,000.

Was an act of bankruptcy committed?

Having satisfied the first criteria, the Court then had to decide whether the respondents had in fact satisfied the second limb of the test. The Court began its analysis by noting that a person on the brink of insolvency may not transfer assets of value to another person if in doing so they intend to obstruct the ability of creditors to collect.

In looking at one of the individual respondents, the Court found he had entered into a Settlement Agreement with his wife nine days after receiving a demand letter from the applicant, in which he transferred 100 Class A shares of the corporate respondent to his wife in exchange for the cancellation of $20,000 in debt. The Court agreed these transfers demonstrated the characteristics of fraud and found it to have been done contrary to the law. The respondent told the Court that he had a debt to his wife because she had lent him $500,000 in order for them to purchase a home together, and that she had also spent “hundreds of thousands of dollars” to renovate the home.

Court concludes respondents qualified as bankrupt

Upon further examination, the Court found that his “explanation for the share transfer falls short of what is required to establish that the transaction is legitimate.” The individual respondent failed to provide evidence of the value of the corporate respondent at the time of the share transfer with an explanation as to how consideration for the transfer was determined. Instead, the Court found that he “provided a narrative” regarding property financing “without supporting documents.”

As such, the Court concluded that the individual respondent committed an act of bankruptcy and the share transfer must be set aside in accordance with the legislation. In looking at the financial statements of the respondents, the Court concluded that they did not have enough income to satisfy their debts, therefore qualifying them as bankrupt.

Did the court have jurisdiction over the matter?

The same individual respondent also claimed that since he resided in Texas, Alberta courts did not have jurisdiction over the matter. However, the Court noted that the legislation “provides that a creditor may make an application for a bankruptcy order against a debtor. A “debtor” is defined in the Bankruptcy and Insolvency Act as ‘“…an insolvent person and any person who, at the time an act of bankruptcy was committed by him, resided or carried on business in Canada….’.”

Ultimately, the legislated and common law indicated that if the party who receives a loan is located in the appropriate jurisdiction, those courts will have jurisdiction over the matter. Accordingly, the Court did have jurisdiction to make an order in favour of the applicants.

Contact the Litigation Lawyers at DBH Law in Calgary for Superior Legal Advice on Debt Collections

Recovering debt can be a complicated, expensive, and exceedingly frustrating process. Accordingly, debt collection should be handled in a strategic and prompt manner. At DBH Law, our trusted team of litigation lawyers have extensive experience helping creditors recover money owing to them quickly and in the most cost-effective manner. We help creditors enforce their rights and collect outstanding amounts. We also assist debtors and defend them against unjustified collections and related claims. To learn more about how we can assist you with your debt collection matter, contact us online or by phone at 403.252.9937 to speak with one of our lawyers.